Contemporary Business Midterm- Chapters 1, 2, 3, 4, 6

Chapter 1
Value: a customer perception that a product has a better relationship than its competitors
between the cost and the benefits
Whats a business?
o Business: any organization or activity that provides goods and services in an
effort to earn a profit
Profit/Loss
o Profit: the financial reward that comes from starting and running a business
Sales (or revenue) expenses = profit
o Loss: when a business brings in less money than it needs to cover expenses
Expenses > Revenues
Entrepreneurs: people who risk their time, money, and other resources to start and
manage a business
Standard of living: the quality and quantity of goods and services available to the
population
Quality of life: the overall sense of well-being experienced by either an individual or a
group
Business Eras
o Industrial Revolution
Technological advances fuel a period of rapid industrialization in America
from the mid-1700s to mid-18000s
Mass production takes hold huge factories replace artisan workshops
Production efficiency
Loss of individual ownership and personal pride in production
o Entrepreneurship Era
Building on the foundation of the industrial revolution, large scale
entrepreneurs emerged in the second half of the 1800s
Building business empires creating enormous wealth, raising the overall
standard of living
Many companies dominated the market forcing out competitors,
manipulating prices, exploiting workers, and decimating the environment
End of 1800s government steps into business- pass laws to regulate
business and protect consumers and workers, creating a more balanced
economy
o Production Era
Early part of the 1900s major business focused on further refining the
production process and creating greater efficiencies
Jobs become more specialized increasing productivity while lowering
costs and prices
1913 Henry Ford assembly line- becomes standard of manufacturing
industries
o Marketing Era

Balance of power shifted away from producers towards consumers

flooding the market with enticing choices
To differentiate themselves from competitors, businesses begin to develop
brands and identities to help consumers understand the differences
between products
Marketing concept- a consumer focus that permeates successful
companies in every department and level
o Relationship Era
Today companies look beyond the immediate transaction with a customer
and aim to build long-term relationships
Satisfied customers become advocates for businesses, spreading the word
Cultivating current customers are more profitable than constantly seeking
new ones
Technology plays a major factor
Nonprofits: business-like establishments that employ people and produce goods and
services with the fundamental goal of contributing to the community rather than
generating financial gain
Factors of production: four fundamental elements that businesses need to achieve their
objectives
o Natural Resources: all inputs that offer value in their natural state such as land,
fresh water, wind, and mineral deposits
Most natural resources must be extracted, purified, or harnesses- people
cannot actually create them
Agricultural products are NOT natural resources
o Capital: the factor includes machines, tools, buildings, information and
technology- synthetic resources that a business needs to produce goods or services
Computers and telecommunications capability- pivotal capital elements
Does not include money- money used to maintain capital
o Human Resources: factor encompasses the physical, intellectual, and creative
contributions of everyone who works within an economy
Education and motivation essential to HR
o Entrepreneurship: entrepreneurs are people who take the risk of launching and
operating their own businesses, largely in response to the profit incentive
Tend to see opportunities where others dont and use their own resources
to capitalize on that potential
Can kick start an economy
Need economic freedom- freedom of choice, freedom from excess
regulation, and freedom from too much taxation
Protection from corruption and unfair competition is a must
Business environment: the setting in which business operates
o Economic environment, competitive environment, technological environment,
social environment, and global environment
Leading edge v. Bleeding edge

o Speed-to-market: the reate at which a firm transforms concepts into actual

products
Bleeding-edge: launch products that fail because theyre too far ahead of
the market
Leading-edge: offer products just as the market becomes ready to embrace
them
Demographics: measurable characteristics of a population
o Include population sixe and density, specific traits such as age, gender, and race
Free trade: an international economic and political movement designed to help goods and
services flow more freely across international borders
General Agreement on Tariffs and Trade (GATT): an international trade agreement that
has taken bold steps to lower tariffs and promote free trade worldwide (125 countries)
Chapter 2
Economics Micro v. Macro
o Economy: a financial and social system of how resources flow through society,
from production, to distribution, to consumption
o Economics: is the study of the choices that people, company, and governments
make in allocating societys resources
Macro: the study of a countrys overall economic dynamics such as the
employment rate, the GDP, and taxation policies
Micro: the study of economic units such as individual consumers, families,
and individual businesses
Fiscal policy: the governments efforts to influence the economy through taxation and
spending decisions that are designed to encourage growth, boost employment, and curb
inflation
o Recession Fiscal Policy
Reduce taxes
Increase spending (more employment)
o Boom Fiscal Policy
Increase taxes
Reduce spending (business spend more)
Government influence economy through spending/taxes
o Debt ceiling: the maximum amount that Congress allows the government to
borrow
o Fiscal cliff: decrease in government spending and increase in taxes
Surplus/Deficit/Debt
o Budget surplus (+): overage when revenue is higher than expenses over a given
period of time
o Budget deficit (-): shortfall when expenses are higher than revenue over a given
period of time
o Federal debt: sum of all the money that the federal government has borrowed over
the years and has not yet repaid

 Monetary policy: refers to the actions that shape the economy by influencing interest
rates and the supply of money
o The Federal Reserve- essentially the central US bank- manages monetary policy
o M1 money supply: all currency plus checking accounts and travelers checks
o M2 money supply: includes M1 money supply plus saving accounts, money
market accounts, and certifications of deposits
o Recession Monetary Policy
Pump in more money
Low interest rates
o Boom Monetary Policy
Recover money
Interest rates increase
Different types of competition
o Pure: many competitors selling identical products
o Monopolistic: many competitors selling differentiated products (perceived
different)
o Oligopoly: handful of competitors selling the products that can be similar or
different
o Monopoly: one producer dominating the industry leaving room for no competitors
Fundamental rights of capitalism
o The right to own a business and keep after tax profits
o The right to private property
o The right to free choice
o The right to fair competition
Socialism/Capitalism/Communism
o Capitalism: economic system (free market/private enterprise) based on private
ownership, economic freedom, and fair competition
o Communism: economic and political system that calls for public ownership of
virtually all enterprises under the direction of a strong central government
o Socialism: economic system based on the principle that the government should
own and operate key enterprises that directly affect public welfare, such as
utilities, telecommunications, and healthcare. Everything else is privately owned
What is GDP?
o Gross domestic product (GDP): measures the total value of all final goods and
services produced within a nations physical boundaries over a give period of
time, adjusted for inflation
All domestic production is included in the GDP even if the firm is foreign
owned
Unemployment rate: percentage of people in the labor force over the age of 16 who do
not have a job and are seeking employment
o Frictional: people looking for jobs w/ certain accolades (marketable skills)
o Structural: industry dies (no marketable skills)
o Cyclical: recession (no jobs)

o Seasonal
Business cycle: the periodic contraction and expansion that occur over time in virtually
every economy
o Contraction: a period of economic downturn, marked by rising unemployment
Recession: when GDP decreases for two quarters
Depression: especially deep and long-lasting recession
o Recover: period of rising economic grown and increasing employment
o Expansion: period of robust economic growth and high employment
What is inflation, disinflation, deflation?
o Inflation: a period of rising average prices across the economy
o Hyperinflation: average monthly inflation rate of more than 50%
o Disinflation: period of slowing average price increases across the economy
o Deflation: a period of falling average prices across the economy
Chapter 3
Opportunity cost: opportunity of giving up the second-best choice when making a
decision
Absolute/comparative advantage
o Absolute advantage: when it can produce more of a good than other nations using
the same amount of resources
o Comparative advantage: when it can produce the goods at a lower opportunity
cost than other countries
Balance of trade: basic measure of the difference between a nations exports and imports
o Trade surplus: exports > imports
o Trade deficit: imports > exports
Balance of payments: measure of the total flow of money into or out of a country
o Balance of payment surplus: inflow > outflow
o Balance of payment deficit: outflow > inflow
Countertrade: international trade that involves the barter of products rather than for
currency
Exchange rate: values of ones currency relative to the currency of other nations
Foreign outsourcing: contracting with foreign suppliers to produce products, usually at a
fraction of the cost of domestic production
Importing/exporting
o Importing: buying products domestically that have been produced or grown in
foreign nations
o Exporting: selling products in foreign nations that have been produced
domestically
Foreign licensing: authority granted by domestic firm to a foreign firm for the rights to
produce and market its product or to uses its trademarks/patent rights in a defined
geographical area
o Licensor- the company that offers the rights
o Licensee- buyer of the rights for a fee

 Foreign franchising: firm expands by offering businesses in other countries the right to
produce and market its products according to specific operational requirements
o Franchisor- offers other business
o Franchisees- the one who gets the right to produce and market its products in
agreement to specific operating requirements
o MAJOR DIFFERENCE FROM LICENSING: the franchisees assume the identity
of the franchisor
Direct Investment: firms acquire foreign firms or develop new franchise facilities from
the ground up in foreign countries
Joint ventures: involve two or more companies joining forces- sharing resources, risks,
and profits but not merging companies- to pursue specific opportunities
Strategic alliances: agreement between two or more firms to jointly pursue a specific
opportunity without actually merging their businesses. Strategic alliances typically
involve less for, encompassing agreements than partnerships
Tariffs/Quotes
o Tariffs: tax levied against imports
o Quotas: limitations on amount of specific product that may be imported
Embargos: total ban on the international trade of a certain item or the total halt in trade
with a particular nation
Free trade: unrestricted movement of goods and services across international borders
World Trade Organization (WTO): permanent global institution to promote international
trade and settle international trade disputes
General Agreement on Tariffs and Trade (GATT): designed to encourage worldwide trade
among its members
North American Free Trade Act (NAFTA): treaty that created free-trading zone among
the US, Mexico and Canada
Chapter 4
Ethics and social responsibility
o Ethics: set of beliefs about right and wrong; good and bad
o Social responsibility: obligation of a business to contribute to society
Legal-Ethical Matrix
o Legal and Unethical
Promoting high-calorie/low nutrient foods with inadequate info about eh
risks
Producing products that will break before their time
Paying non-living wages to workers in developing countries
o Legal and Ethical
Producing high-quality products
Rewarding integrity
Leading by example
Treating employees fairly
Contributing to the community and respecting the environment

o Illegal and unethical

Embezzling money
Sexual harassment
Price fixing
Fraudulent accounting
o Illegal and ethical
Rock-bottom prices to only distributors in undeserved areas
Guaranteeing lower prices in low0income countries
Universal Ethical Standards: ethical norms that apply to all people across a broad
spectrum of situations (Caux Round Table)
o Trustworthiness, Respect, Fairness, Caring, Responsibility, and Citizenship
Business ethics: application of right and wrong; good and bad in a business setting
Code of ethics: formal written document that defines the ethical standards of an
organization and gives employees the information required to make ethical decisions
across a range of situations
Social Responsibility: the obligation of a business to contribute to society
Stakeholders: groups that have stakes in performance and actions of an organization
Consumerism: social movement focusing on customer rights
o Right to be safe, informed, choose, heard
Planned obsolescence: deliberately designing products to fail in order to certain the time
period between purchases
Sarbanes-Oxley Act: sets higher ethical standard for public corporations and accounting
firms and require financial officers and CEOs to certify the validity of their statements
Corporate Philanthropy: includes all business donations to nonprofit groups includeing
money and products ($$$)
Corporate responsibility (initiatives): business contributions to the community though the
actions of the business itself ($$$ + time)- higher form of giving
Sustainability: doing business to meet the needs of the current generation without
harming the ability of future generations to meet their needs
Green marketing/Carbon footprint
o Carbon footprint: amount of harmful greenhouse gases that a firm emits through it
operations
o Green marketing: developing and promoting environmentally sound products and
practices to gain a competitive edge
Social audit: evaluation of how well a firm is meeting its ethics and social responsibility
goals
Chapter 6
Sole Proprietor: single owner manages the company (single taxation)
o Advantages
Ease of formation
Retention of control
Pride of ownership

Retention of profits
Possible tax advantage
o Disadvantages
Limited financial resources
Unlimited liability
Limited liability to attract & maintain workers
Heavy workload &responsibilities
Lack if permanence
Partnership: voluntary agreement between two or more co-owners of business for profit
(single taxation)
o Advantages
Ability to pool financial resources
Ability to share responsibilities
Multiple skill sets
Ease of formation
Possible tax advantage
o Disadvantage
Unlimited liability
Potential for disagreements
Lack of continuity
Difficulty in withdrawing from business
Limited partnership: includes at least one general partner who actively manages the
company and accepts unlimited liability
o Other partners give up the right to actively manage the company in exchange for
limited liability
Master limited partnership: looks like corporation but has limited liability and taxed like
partnership
LLP: all partners have right to participate in the management and have limited liability
for company debts
o Only unlimited if one partner fraudulent = unlimited liability
C Corporation: business is considered a separate legal entity distinct from its owner
(double taxation)
o Offers limited liability to all its owners who are called stockholders
o Requires filing articles of incorporation, paying filing fees and adoption of
corporate bylaws
o Institutional investors: organization that pools contributions from investors,
clients, or depositors and uses their funds to buy stocks and securities
o Board of directors: elected by stockholders to represent their interests
o Advantages
Limited liability
Permanence
Ease of switching owners
Ability to raise capital

 Specialized management
o Disadvantages
Expensive & complex to form
Complications with multiple states
DOUBLE TAZATION of earnings plus additional tax
Paperwork
Must be transparent